Investment returns before morals, concludes QC

Local government pension schemes should not invest in ethical products or companies unless the return they predict matches that available from other sources, according to a new legal opinion.
Mr Nigel Giffin QC, a barrister specialising in government law, was appointed by the Local Government Association to investigate administering authorities of the LGPS.
His legal opinion has concluded that choices between investments must be made on financial, rather than moral grounds.
It said: “…the power (in fact the duty) to invest fund monies…is a power of investment.
“Therefore it must be exercised, when it comes to the discretion to choose one investment rather than another, for investment purposes, and not for some other purpose.”
Giffen said that it would be impermissible for the administering authority to invest in social housing or a local football club because they were considered important to the area, if it was not likely to be a prudent investment.
Councils should not refuse to invest in tobacco or fracking companies if that decision was likely to adversely impact returns or lead to the fund being exposed to an over-concentrated investment portfolio.
But, in Giffen’s judgment, councils could consider wider issues if doing so would not risk significant financial detriment to the fund.
He said: “I think that is consistent with the Investment Regulations, which require the investment policy to state how far social, environmental or ethical considerations are taken into account.
“That would be an implausible provision if such considerations were invariably or almost invariably impermissible ones to take into account…”
Catherine Howarth, chief executive of ethical investment campaign group ShareAction, said: “The legal opinion endorses the ethical tie-break principle. According to this principle, so long as a pension fund can show there is no financial disadvantage, the fund is free to divest from tobacco”.
“This opens the way for scheme members in local authority funds, to whom fiduciary duties are owed, to propose that their funds look for alternatives to tobacco that deliver the same long-term investment returns.
“I predict that certain health workers, who recently joined the local government pension funds, will formally request this process be undertaken. I further predict it will result in tobacco being held by fewer of the local government pension funds in future.”

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